Gross profit or sales profit or gross operating profit is the difference between revenue and the cost of making a product or providing a service, before deducting overheads, payroll, taxation, and interest payments. In general, it is the profit shown on a transaction if one disregards the indirect costs. It is the revenue that remains once one deducts the costs that arise only from the generation of that revenue. For a retailer, gross profit is the shop takings less the cost of the goods sold. For a manufacturer, the direct costs are the costs of the materials and other consumables used to make the product. For example, the cost of electricity to operate a machine is often a direct cost while the cost of lighting the machine room is an overhead. Payroll costs may also be direct if the workforce is paid a unit cost per manufactured item. For this reason, service industries that sell their services by time units often treat the fee-earners' time cost as a direct cost. Gross profit is an important guide to profitability but many small businesses fail because they overlook the regular demand to meet the fixed costs of the business. The indirect costs are considered when calculating net income, another important guide to profitability.
See also
- Gross margin, the ratio of gross profit to revenue.
- EBITDA
